Our most distinguished economists and government experts tell us that the U.S. has an unemployment crisis. There are millions of high quality workers out there who cannot find jobs. Paul Krugman here speculates that employers have colluded to pay workers less. Yet in situations where an average consumer becomes an employer, the labor market looks very different than how it is described by our brightest minds.
Suppose that you want to hire a house cleaner. This is a job that requires only very basic skills and training. English fluency is not required and the job may be competently performed by a recent immigrant. You might think that you could hire someone for the $9.45/hour figure cited in this article on the 2012 labor market (average wage for a young high school graduate). But in fact you will be paying closer to $25 per hour. Similarly, being able to take care of a child is a common skill and does not require English fluency yet good luck finding a nanny for less than $17-25 per hour.
Are the experts wrong or is the market experience wrong? How is it that people who know that they can’t find a reliable house cleaner or nanny for less than $17-25 per hour can sit down and read, without skepticism, complicated theories about a “skills gap” or a conspiracy theory or that great quality workers are sitting idle?
[At the other end of the labor market, this Bloomberg.com article chronicles California’s public employees, including “Mohammad Safi, graduate of a medical school in Afghanistan, collected $822,302 last year [working as a prison psychiatrist], up from $90,682 when he started in 2006, the data show.”]
I think krugman is totally wrong but I don’t understand your argument. Isn’t it consistent with his theory that a good worker in an unskilled position will get more when the employee can’t collude (nanny) vs where they might (fast food)?
Anthony: Hmmm… Maybe you are onto something. Probably the cleaning services that clean office buildings, etc., pay less per hour than I would have to pay directly to a cleaner/nanny. But on the other hand, the cleaning services aren’t owners of slaves. The folks who clean office buildings at night could quit and clean my apartment during the day at a much higher wage!
I think this says more about the (lack of) bargaining power that “average consumer as employer” has. Plus, nannies are a sort of different type of employee, as some people are very picky and will use only recommended nannies (after which, of course, you will pay the going rate — meaning as much you’ll be able to pay).
When compared to the ‘average american’, you’d be shocked if you found out how much LESS recent immigrants or people in more ethnic communities pay for services like cleaning and nannies.
Tiago: People will pay “as much as [they] are able to pay”? Why would that be? In an economic market, the market-clearing price is not supposed to be 100% of what you’d be willing to pay for something. If that were true, each of us would pay 99.99% of our income for clean water because without it we would die.
I believe this relates how most people view risk (it scares them). Most workers are willing to accept lower wages from large companies with their perceived reliability. Lone consumers must pay more to compensate for worker’s aversion to risk.
I worked at GE where workers earned 30-40% less than other local companies in return for the prestige and stability of working for the world’s largest company. Daily propaganda on the internal website told us what great jobs GE was providing us. Yet within 3 years 90% of the local employees were replaced by offshore workers from “low cost centers” who “visited” the office for months at a time.
Another example, back in the 90s I won a contract for a 1yr project and needed to hire 10 programmers. I offered a $50/hr (=$100k/yr) contracting rate and got zero (!) responses. However, when I changed the ad to a $50k/yr salary I was flooded with resumes. It was exactly the same job+risks but workers viewed the “stability” of a salary vs. a contract as being worth a 50% haircut.
Both nannies and cleaners are quite a personal hire as you invite them into your home and, in the nanny’s case, trust them with your children.
Maybe the employers don’t drive a hard bargain because they feel that if they screw the employee, the employee can’t be trusted anymore.
“Reassuringly expensive” comes to mind.
Quite a different situation than hiring employees at a large company, where the employer probably doesn’t care that one out of 100 stops showing up. Having your nanny quit out of the blue is very inconvenient.
Bas: You’re saying that American workers are so fantastic that the only reason employers aren’t hiring them and/or paying more is due to collusion. But then that if you want someone who will show up more or less reliably you need to pay double the average wage for a person with the required skill? And that a currently unemployed worker who did manage to find a job at the average wage for his or her education level, should be expected to be absent at random once he or she did land that long-desired job?
I don’t think $25/hour is unreasonable in this situation. Your average housecleaner may only be “billable” from 50% to 75% of the time, depending on how much time is spent moving from house to house. I know that mine, for instance, spends at least an hour getting here. So that right there cuts the effective wage to perhaps $16/hr. When you throw expenses on top of that (since cleaners are mostly self-employed, and therefore pay for gas, at least some of the supplies they use, insurance, self-employment payroll tax if they’re keeping things legal, etc.) and you’re pretty close to that average hourly rate. So this one doesn’t surprise me.
It doesn’t really speak to the broader labor market issue.The fact that prevailing rates for housekeeping are at or near their economic bottom (the point at which it doesn’t make sense for someone to clean houses) doesn’t mean that there aren’t skilled people elsewhere in the economy looking for work. It does mean that if those people decide to go into house cleaning that the price of house cleaning isn’t going to drop much.
An hour spent at your home cleaning involves a good deal more than an hour spent working — travel time there and back, invoicing and other administration, buying cleaning materials, and so on all count as well.
The fact that employers who don’t have power to collude pay higher wages supports the idea of collusion, as the other commenters have pointed out.
Further evidence is that some silicon valley companies have actually been investigated by the DOJ and sued by employees for collusion, with the last I heard of this being that they were requried to “voluntarily” stop said practices in order to make the DOJ go away.
Given that Professor Krugman is very clear in his article that this is a matter of investigation: “I don’t know how much of the devaluation of labor either technology or monopoly explains, …” rather than one of certainty or even a thesis, and that the evidence you used to paint him as a crackpot actually supports this idea that he himself has marked as speculative and unproven, I think it says that his nobel-prize in economics continues to be safe…
No idea if Dr. K is right about collusion, but the housekeeper piece seems pretty straight forward and most of the answer is already in the data above:
1. Individuals employing someone have less bargaining power due to:
You only control a small portion of your housekeepers salary
Hiring someone full time is like buying in bulk. – you expect a discount
Transaction costs (how much time can you spend vetting out a maid)
Plus not as much opportunity to collude
And how many housekeepers does your circle of friends know (scarcity)
2. These are both hires that will have free access to your house
Comparatively, the guys who do my lawn make less than my housekeeper
3. Maids and other self employed individuals have higher overhead
Even if they evade taxes, going from job to job takes time and energy in most cases
I don’t pay my housecleaner directly for the time she commutes to my house
Stringing together 40 hours of work in a week may result in a lot of less useful dead time
And that assumes your housecleaner can find 40 hours in the first place
4. There are also may be a component of people feeling like y get what you pay for (so choosing a higher priced option with the idea you will get a better product out of it.)
People pay for a perceived benefit without reason all the time. (Generic vs brand name medication comes to mind)
Philg: I would reframe that a bit. You do need to pay more but you don’t need to pay double the average wage to get a worker that will show up regularly. Big companies can pay the average wage and are willing to take the relatively large risk that the work is unreliable and the small risk that they will try to steal from the company. They can take this risk because it is relatively cheap to replace low skilled workers, the have cameras and managers making sure people are working. This also has the additional benefit of motivating workers that are not self motivated at this average wage. One person trying to find a house cleaner does not have this. It is very stressful firing someone you now know and it is difficult to find and train a new one. That person needs to trust that the cleaner will be hard working and not steal because he can’t watch them. This will mean he will have to pay more than the normal rate. In additional, the dependence on trust and to reduce turnover the person will be less willing to price shop under the going rate or give an inexperience person a chance.
Then there are factors that make it harder to get a job working for an individual. You might not need to speak English for the job but being articulate and being able to market yourself would help you get the job. I imagine that most people are hired based on recommendations so getting into the market is hard.
Part of my current job involves hiring people. If I want to hire someone and pay her $10/hr in actual wage, this is what I have to budget:
Wage: $10/hr
Fringe benefits (payroll taxes, health insurance, retirement, vacation and illness reserve, etc.): 25% x Wage
Consumable materials & supplies (e.g. chemicals, wipes, etc.): 20% x Wage
Indirect Costs (rent and utilities on office space, administrative costs, insurance, routine equipment maintenance, etc. pro-rated by employee wage): 70% x (Wage + Fringe + Materials)
So, I need to budget $24.65/hr for the employee. If I am charging a customer for this employee’s time, I need to charge about $25/hr to recover all my costs.
In terms of my hiring a house cleaner, sure I could pay a neighborhood high-school kid $10/hr cash under the table to clean my house. This, however, is highly unreliable and at best a temporary arrangement. So I choose to go with a highly recommended professional cleaning service at $25/hr. Unlike a teen-age freelancer, I know someone from the cleaning service is going to show up every two weeks as I scheduled and do special cleanings when I need them, I know they are not going to disappear in a year, I know they are going to do a good job (and they will promptly correct occasional screw ups when I complain), I know they are not going to steal anything (if they value staying in business), and I know they have insurance coverage if their employee is injured on the job. I doubt very much that the people doing the actual cleaning earn a wage over $10/hr, so my paying $25/hr to the business seems about right. (My cleaning service brings its own chemicals, wipes, towels, vacuum cleaners, etc.).
It was exactly the same job+risks but workers viewed the “stability” of a salary vs. a contract as being worth a 50% haircut.
Contractors need to buy their own healthcare and pay their half of the self-employment tax, among other requirements. Doubling the hourly rate for contract work is pretty standard.
A programming contractor who takes a job at $50/hour is limiting his future employment.
Point of clarification, in your point you wrote “up from $90,682 when he started in 2006, the data show”. The 90,682 was just for his first 6 months of pay. Don’t feel too bad, I am sure he made much more over the next 6 months.
The wages of house cleaners and nannies tell you a lot about the cost of housing in an expensive metro area. Take a look at George Lucas, Facebook, and the Crisis of NIMBYism: Dumb rules prevent Silicon Valley from building the houses and offices we need to power American innovation for one specific example on the opposite coast whose general principles apply to Bostonians.
If you’d like more detail, take a look at Edward Glaeser’s The Triumph of the City and Ryan Avent’s The Gated City for explanations of how we got to these insanely expensive urban areas and how we can make cities more functional and housing more affordable. The short answer is “reduce or eliminate height and minimum parking restrictions.” Donald Shroup’s The High Cost of Free Parking focuses more on suburbia but is also good.
If you lived in, say, Houston or Atlanta, housing would be cheap and plentiful, and house cleaners and nannies would be much less expensive.